Investors shouldn’t worry: Ship orders remain in an uptrend

Market Realist

Dry bulk shippers are silent—but silence is golden (Part 2 of 10)

(Continued from Part 1)

Why are ship orders important?

The number of ships on order reflects managers’ expectations of future supply and demand differences. When they expect future supply to increase more than demand, managers will refrain from purchasing new ships. However, when they expect demand to outpace supply growth, companies return to the shipyard to place new orders, on the condition that they expect to generate profits with the new vessels. So rising or high levels of ship orders often indicate that shipping rates will rise.

Dry Bulk Vessels on Order 2013-10-31

Orders continue to show some strength

On October 25, ship orders of Panamax vessels continued to rise. Orders as a percent of the existing number of ships climbed from 17.59% in the prior week to 18.01%. Conversely, orders for Capesize vessels, the largest class of ships primarily used to haul iron ore and coal, fell further from a drop of 10.66% on October 11 to 10.57% on October 18, and now to 10.38%. Analysts use a percent of existing vessels because it accounts for changes in the number of ships over time.

A turnaround remains

Backlogs for new ship constructions have started to turn around since the start of the year, with Capesize and Panamax vessels performing well—a reflection of optimism among managers regarding the future profitability of these ships.

Since dry bulk ships usually take one to two years to construct, the indicator is often more relevant to long-term investment horizons. But the market is often forward-looking by roughly a year, depending on whether they’re short-term or forward-looking. This behavior can significantly influence share price movements.

So an increase in orders can have an immediate positive impact on the share prices of companies and ETFs like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and the Guggenheim Shipping ETF (SEA).

Positive sentiment remains intact

Despite an elevated order level compared to Supramax or Capesize vessels, the recent rise in Panamax orders is positive. Although dry bulk shipping stocks have pulled back after a recent surgemanagers remain optimistic about the future. It will be a good idea to listen to what managers have to say about the future of shipping industry in their upcoming earnings reports. As long as orders remain high or continue to increase, investors can expect overall earnings for shipping companies to rise over the long term.

Continue to Part 3

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